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Capitol Comment

Capitol Comment 275 - Clinton Has It Backward: More Telephone Service Would Result From Fewer Taxes, Not New Taxes

Amid a flurry of travel last month, President Clinton – flanked by two commissioners from the Federal Communications Commission (FCC) – announced new programs to help poor Americans get online. Unfortunately, his latest proposal will only trap the poorest of American consumers into yesterday’s technologies.

Clinton announced a $17 million – or about 3 percent – increase to the federal Lifeline1 program, a telephone service subsidy for poor Americans.

Who Qualifies for Lifeline? Citizens who receive Medicaid, food stamps, Supplemental Security Income, federal public housing assistance, or subsidies from the Low-Income Home Energy Assistance Program.

What Does Lifeline Offer? Discounted pricing on the basic service offered by the local telephone company. The new program would make telephone service available to Native American households that live on reservations for only a dollar a month.

How is the Expansion of Lifeline to be Funded? An increase in the hidden taxes consumers pay on long-distance service.

In the eight years President Clinton has held office, there has been less than a one-half of one percent increase in the number of households with telephone service. In large part this is because the administration is wedded to a system of cross-subsidies to artificially set prices for different types of telephone service. At the same time, this regulatory model locks poor consumers into aging technologies that cannot deliver high-speed Internet service.

It appears as if the president is using Native Americans for photo-op politics when he could have introduced real reform to telecommunications policy. To wit, where is a proposal to eliminate taxes on communications and remove outdated rules and regulations preventing the natural growth and development of technology use by consumers?

Universal service programs such as Lifeline stand in the way of new competition. Such programs are predicated on the idea that the best way to make more communications services available to a greater number of people is to subsidize decades-old technologies through taxes placed on other communications services.

Today there are more than 25 different federal programs that give financial support for telecommunications services. The new Clinton proposal expands a system of cross-subsidies that no longer makes sense at a time when the traditional phone company is not the only source for communications services.2 The president’s plan taxes long-distance telephone service and discounts local telephone service. In order for the subsidies to flow from one class of consumers, through the long-distance carriers, and through the local carriers, to another class of consumers, strict restrictions are required on the type of service a firm can offer. However, the stated goal of Congress and the FCC is to allow more choices for consumers, in all types of service – including services that are not based on the traditional telephone network like cable, satellite, and wireless.

Universal service is a shell game. Consumers pay all manner of fees, taxes, and charges based on FCC regulations.3 Then discounts – as well as artificially inflated rates – are passed on to select groups of consumers.

During his first inaugural address, January 20, 1993, President Clinton claimed to "force the spring" in order to have the "courage to reinvent America." Sadly, rather than allowing the natural forces of competition and innovation to spread new communications technologies across the country, this spring Clinton and the FCC continue to offer new ideas on how to tax consumers’ use of communications services.

Government officials should leave well enough alone. Forty-six years passed before one-quarter of American households were wired for electricity. It took only 35 years for the telephone and 16 years for the personal computer to become as common. By 1992, only about 15 percent of Americans owned their own computer but 46 percent of children and nearly 30 percent of adults used a computer at school, home, or work.

Internet access for more Americans, the objective of the latest Clinton proposal, reached one-quarter of the population in an amazing seven years without any government intervention. Today, a majority of households are online.

Universal service programs – including the new Clinton proposal – tend to subsidize the services that are most easily subsidized rather than the services that are most useful. Oftentimes these programs require new fees and charges on other telecommunications services. Consumers would be better served if policymakers had the courage to allow the market – through the choices consumers make about various goods and services – rather than distant government officials shape the future of communications in America. The president’s proposal does nothing to allow low-income consumers to exercise choice in the marketplace. Instead it provides money to telephone companies who then provide no-frills basic service to low-income consumers.

Clinton can no more control nature and "force the spring" than public officials can plan a subsidy system that would improve upon the free market.

1The Lifeline program was initiated in 1985 to subsidize basic telephone service. Steep discounts are provided to low-income consumers for voice-grade access to the public-switched network as well as emergency and operator services. Currently, about 5.6 million Americans receive subsidies from the $500 million Lifeline program.

2 Telecommunications subsidies are offered by the departments of Commerce, Defense, Education, and Energy, as well as sub-cabinet level agencies like the Federal Communications Commission, the National Telecommunications and Information Administration, the National Institutes of Health, the National Science Foundation, and the Small Business Administration.

3 The latest budget proposal from the Administration demands that consumers pay at least $4.897 billion. See page 1147 of the FY 2001 Budget.